Your Home’s Market Value vs Replacement Cost

Choosing the right amount of home insurance coverage will allow you to rebuild your home in the event of a total loss. This amount is known as the replacement cost of your home, and it’s different from the market value of your home.

If you woke up tomorrow and learned a major storm was barreling your way, would you be ready? Not “grab the flashlight and emergency preparedness kit kind of ready, though that’s certainly important. We’re talking about being able to replace your home should a storm, or other disaster, leave it heavily damaged or in ruins.

Although admittedly not the most exciting activity on anyone’s to-do list, taking time now to understand exactly what your homeowners policy does and doesn’t cover could save you a lot of money in the long run. For example, let’s say your house was insured for $200,000 and the cost of rebuilding it after a fire burned it to the ground was $300,000.

Guess whose pocket the additional $100,000 would come from? Yours. That would not be the case, however, if you had opted for full replacement coverage, and extended replacement coverage would have provided even more protection, paying 125 percent or more of the cost of rebuilding.

If sorting out the details of your policy seems a bit overwhelming, fear not. Ask your independent agent to assist and answering these four basic questions can help you start the process:

1. Do I Have Enough Insurance to Repair/Rebuild My House?

The cost of rebuilding a home has nothing to do with its market value or the amount of your mortgage. What a buyer might be willing to pay for your home or the amount of money you still owe on it are not related to the current cost of the materials, labor and other services associated with rebuilding it from the ground up. In fact, at a time when the market value of your home might have declined, rebuilding costs might have increased.

Types of Coverage

Despite a major drop in construction activity since the Great Recession, construction prices have actually risen significantly, according to the Insurance Information Institute (III). You need to be sure your policy covers the cost of rebuilding your home at current construction costs.

A Replacement Cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality.

An Extended Replacement Cost policy provides additional coverage of 25 percent or more over the limits of your policy, which can be critical if there is a widespread disaster that pushes up the cost of building materials and labor.

A Guaranteed Replacement Cost policy will pay for rebuilding your home no matter how much it costs, but these policies do cost more on average.

Determining the Value of Your Home

Your Hometown insurance agent can help you in determining the cost of replacing your home, but for comparison purposes, you may want to do some research on your own. A suggestion is to multiply the building costs in your area by the total living area square footage of your home. To find out what the building rates are in your area, consult your local builders association or a reputable builder. Professional replacement cost appraisers can also provide this service (the fee can run about $300).

Remember to include in your calculations any special features in your house, such as:

A finished basement

High-end woodworking

Upgraded kitchen or bathrooms

Structures on your property other than your home, such as sheds and detached garages.

2. Does My Homeowners Insurance Cover All Disasters?

Standard home insurance policies provide coverage for disasters such as fire, lightning and hurricanes. They do not include coverage for flood, including flooding from a hurricane (although there are steps you can take to minimize flood damage). Flood insurance is available through the National Flood Insurance Program (NFIP), or can be purchased by contacting Hometown.

We can even quote Excess Flood Protection, which provides higher limits of coverage than the NFIP in the event of catastrophic loss by flooding.

3. Is My Coverage Up-to-Date?

An annual insurance policy checkup is the best way to ensure that your coverage keeps up with local building costs and changes in the value of your home and personal property. Such changes may be due to:

Fluctuations in the market

Improvements you make to your house

Appreciation in the value of jewelry or other personal possessions

Know what your deductibles are so you know how much you’ll be expected to pay before your coverage kicks in. You should also determine if there are any exclusions in your policy for certain types of damage, such as mold, or if your home is in an area at high risk for floods, wildfires, hurricanes or earthquakes.

Remember, any insurance policy is a contract and you need to know what is in it.

As your independent agent we are here to advise, but you have a role as well. Help us to help you!

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